8 Min Read
Feb 13 - Fitch Ratings has downgraded the Issuer Default Ratings (IDRs) of CenturyLink, Inc. (CenturyLink) and its subsidiaries to 'BB+' from 'BBB-'. The downgrade to 'BB+' also applies to CenturyLink's approximately $6.25 billion of senior unsecured notes and its senior unsecured revolving credit facility. The outstanding $10.1 billion aggregate amount of senior unsecured notes of Qwest Corporation (QC) and Embarq Corporation (Embarq) have been affirmed at 'BBB-'. Fitch has withdrawn the 'F3' short-term IDR and commercial paper (CP) rating associated with CenturyLink's currently unused CP program. A full list of rating actions is provided at the end of this release. The Rating Outlook is Stable. The rating actions stem from changes in CenturyLink's financial policy announced today. The company will initiate a common stock repurchase program, which while accompanied by a dividend reduction, will result in a lower level of debt reduction over the next two years than previously incorporated in Fitch's expectations. The company plans to repurchase $2 billion in common stock by February 2015, primarily funded from free cash flow (FCF). Annual FCF improves by approximately $450 million as a result of a reduction in the common stock dividend of approximately 25%, but on a net basis, cash returned to shareholders will increase. In Fitch's opinion, CenturyLink's change in financial policy will lead to a credit profile no longer reflective of a 'BBB-' rating, as CenturyLink is not expected to reduce leverage to the 2.5x threshold Fitch believes necessary for CenturyLink to maintain an investment grade rating. Prior to the policy change, Fitch had expected CenturyLink to reduce leverage to 2.5x by the end of 2014 (net leverage was approximately 2.7x at year-end 2012). Under the revised financial policy, CenturyLink has articulated a goal to maintain net leverage under 3.0x, and expects to use a portion of FCF to reduce debt. KEY RATING DRIVERS The following factors support the rating: --Fitch's ratings are based on the expectation that CenturyLink will demonstrate steady improvement in its revenue profile over the next couple of years; --FCFs are expected to strengthen with the reduction in the dividend, and liquidity is expected to remain relatively strong; --Execution risks related to the integration of Qwest Communications International, Inc. (Qwest) and Savvis, Inc. (Savvis) are nearly behind the company; and --The affirmation of QC's and Embarq's issue ratings is based on the relatively lower leverage of the two entities, and their respective debt issues' senior position in the capital structure relative to CenturyLink. The following concerns are embedded in the rating: --The company's change in financial policy, which incorporates the maintenance of net leverage of up to 3.0x, less restrictive than its previous mid-2x target; --The decline of traditional voice revenues, primarily in the consumer sector, from wireless substitution and moderate levels of continuing cable telephony substitution. Although such revenues are declining in the revenue mix and are being replaced by broadband and business services revenues, these latter sources have lower margins. Fitch expects CenturyLink's revenues to decline slightly in 2013, and reach stability in 2014. Revenues from high-speed data and certain advanced business services, including the managed hosting and cloud computing services offered by Savvis and a modest but growing level of revenues from facilities-based video, are expected to contribute to stability. On a net debt basis, leverage in 2012 was approximately 2.7x (excluding integration and merger-related costs), consistent with the 2.7x to 2.8x range Fitch expects over the next several years. Debt reduction in 2013 and 2014 is expected to be modest. Additionally, there will be some pressure on EBITDA as there are lower incremental merger-related cost savings in 2013 than in 2012. CenturyLink's total net debt was $20.4 billion at Dec. 31, 2012. Financial flexibility is provided through a $2 billion revolving credit facility, which matures in April 2017. As of Dec. 31, 2012, approximately $1.18 billion was available on the facility. CenturyLink also has a $160 million uncommitted revolving letter of credit facility. The principal financial covenants in the $2 billion revolving credit facility limit CenturyLink's debt to EBITDA for the past four quarters to no more than 4.0x and EBITDA to interest plus preferred dividends (with the terms as defined in the agreement) to no less than 1.5x. QC has a maintenance covenant of 2.85x and an incurrence covenant of 2.35x. The facility is guaranteed by Embarq, Qwest Communications International Inc. and Qwest Services Corporation (QSC). In 2013, Fitch expects CenturyLink's FCF (defined as cash flow from operations less capital spending and dividends) to range from $1 billion to $1.3 billion. Expected FCF levels reflect capital spending within the company's guidance range of $2.8 billion to $3 billion. Within the capital budget, areas of focus for investment primarily include continued spending on fiber-to-the-tower, data center/hosting, broadband expansion and enhancement, as well as spending on IPTV, the company's facilities based video program. Fitch believes CenturyLink has the financial flexibility to manage upcoming maturities due to its FCF and credit facilities. Debt maturities in 2013 and 2014 are approximately $1.1 billion and $0.7 billion, respectively. Going forward, Fitch expects CenturyLink and QC will be CenturyLink's only issuing entities. CenturyLink has a universal shelf registration available for the issuance of debt and equity securities. RATING SENSITIVITIES: Fitch does not expect a positive rating action over the next several years based on its assessment of the competitive risks faced by CenturyLink and expectations for leverage. A negative rating action could occur if: --Consolidated leverage through, but not limited to, operational performance, acquisitions, or debt-funded stock repurchases, is expected to be 3.5x or higher; and --For QC or Embarq, leverage trends toward 2.5x or higher (based on external debt). Fitch has taken the following rating actions. The Rating Outlook is Stable. CenturyLink --Long-term IDR downgraded to 'BB+' from 'BBB-'; --Senior unsecured $2 billion revolving credit facility downgraded to 'BB+' from 'BBB-'; --Senior unsecured debt downgraded to 'BB+' from 'BBB-'; --Short-term 'F3' IDR withdrawn; --Commercial paper 'F3' rating withdrawn. Embarq Corp. --Long-term IDR downgraded to 'BB+' from 'BBB-'; --Senior unsecured notes affirmed at 'BBB-'. Carolina Telephone & Telegraph (CT&T) --IDR downgraded to 'BB+' from 'BBB-'; --Debentures affirmed at 'BBB-'. Embarq Florida, Inc. (EFL) --IDR downgraded to 'BB+' from 'BBB-'; --First mortgage bonds downgraded to 'BBB-'from 'BBB'. Qwest Communications International, Inc. --IDR downgraded to 'BB+' from 'BBB-'; --Senior unsecured notes downgraded to 'BB+' from 'BBB-'. Qwest Corporation --IDR downgraded to 'BB+' from 'BBB-'; --Senior unsecured notes affirmed at 'BBB-'. Qwest Services Corporation --IDR downgraded to 'BB+' from 'BBB-'. Qwest Capital Funding --IDR at downgraded to 'BB+' from 'BBB-'; --Senior unsecured notes downgraded to 'BB+' from 'BBB-'.